How The French Economy Lost Ground

For more than a decade following the launch of the euro in 1999, France’s labor costs were higher than Germany’s — and they rose far faster.

That has hindered French businesses competing on world markets. Recently, however, reforms initiated in 2012 have made France more competitive on the cost of labor compared to Germany. French labor costs are now rising in line with the rest of the eurozone, and at a lesser pace than in other industrialized countries. However, French companies continue to be penalized by the higher cost of unqualified labor.

The difficulty of French products and services to compete on the world stage is reflected in the country’s persistent current account deficit. Unlike Germany’s high-quality products, which are relatively protected from economic cycles, the goods France exports are vulnerable to changes in affordability. The disparity is partly a result of the lower skills of the French adult population. And it means that global recessions tend to hit France disproportionately hard.

Swelling unemployment figures weigh on public finances, putting a brake on the government’s capacity to lower taxes on businesses and boost growth. The state-controlled French welfare system — which covers health care, unemployment benefits and pensions — is financed by payroll taxes on both businesses and individuals. One of President Emmanuel Macron’s plans is to make it less costly, notably through a system of incentives for companies to create permanent jobs.